Deck 7: Inventory

Question 1

A company that makes the following journal entry at the time of sale is using which of the following inventory systems? $$\begin{array}{l}\text { Dr. Cost of sales } \quad \mathrm { xxx }\\\text { Cr. Inventory } \quad \mathrm { xxx }\end{array}$$

A)Periodic system
B)Perpetual system
C)Just-in-time system
D)Specific identification system

Answer 1

Perpetual system

Question 2

Which of the following companies would have a relatively small amount of inventory on their balance sheet?

A)A retail bookstore
B)An automobile manufacturer
C)A forest products producer
D)A regional airline

Answer 2

D

Question 3

What is the correct equation to calculate the cost of sales in a periodic inventory system?

A)Beginning inventory + Purchases - Ending inventory
B)Beginning inventory + Purchases + Ending inventory
C)Beginning inventory - Purchases + Ending inventory
D)Beginning inventory - Purchases - Ending inventory

Answer 3

A

Question 4

In most companies the flow of costs related to inventory does not match the physical flow of the goods.All of the following are reasons why the cost flow and physical flow may differ, except?

A)It is not cost effective.
B)It is not physically possible.
C)It does not provide good internal control.
D)None of the above

Question 5

A company uses a periodic inventory system and has the following information at the end of the accounting period: beginning inventory $40,000, purchases $135,000, and ending inventory $27,500.What was their cost of sales for the period?

A)$122,500
B)$135,000
C)$147,500
D)$202,500

Question 6

In a perpetual inventory system what kind of entry is used to record the cost of sales?

A)A closing entry
B)A reversing entry
C)An adjusting entry
D)A transactional entry

Question 7

A company that makes the following journal entry at the time of purchasing inventory is using which of the following inventory systems? Dr. Purchases $\quad \mathrm { xxx }$
Cr. Accounts Payable $\quad \mathrm { xxx }$

A)Periodic system
B)Perpetual system
C)Just-in-time system
D)Specific identification system

Question 8

If a company is using a perpetual inventory system, which of the following entries is the correct journal entry to record the purchase of $10,000 of merchandise on account?
A. Dr. Inventory $\quad 10,000$
$\quad$ Cr. Accounts payable $\quad 10,000$
B. Dr. Inventory $\quad 10,000$
$\quad$ Cr. Purchases $\quad 10,000$
C. Dr. Purchases $\quad 10,000$
$\quad$ Cr. Inventory $\quad$ 10,000
D. Dr. Purchases $\quad 10,000$
$\quad$ Cr. Accounts payable $\quad 10,000$

A)Option A
B)Option B
C)Option C
D)Option D

Question 9

A company that makes the following journal entry at the time of purchasing inventory is using which of the following inventory systems? Dr. Inventory $\quad \mathrm { xxx }$
Cr. Accounts Payable $\quad \mathrm { xxx }$

A)Periodic system
B)Perpetual system
C)Just-in-time system
D)Specific identification system

Question 10

In which of the following situations would the car be classified as inventory?

A)A car in a showroom of a car dealership.
B)A car used to deliver pizza at a pizza restaurant.
C)A vintage 1957 Chevy bought by the president of a manufacturing company.
D)The car driven by the sales manager and paid for by the company.

Question 11

If management wanted to keep track of inventory that was stolen or damaged separately from their cost of sales, which inventory system should they use?

A)Periodic system
B)Perpetual system
C)Just-in-time system
D)No inventory system separates stolen goods from the cost of sales.

Question 12

In a periodic inventory system, what kind of entry is necessary to record the cost of sales?

A)A closing entry
B)A reversing entry
C)An adjusting entry
D)A transactional entry

Question 13

Which of the following should be included in the cost of the inventory?

A)Salaries paid to warehouse employees.
B)The construction cost of shelves used to store inventory.
C)Shipping and handling on inventory purchases.
D)Advertising of inventory for sale.

Question 14

If a company is using a periodic inventory system, which of the following entries is the correct journal entry to record the purchase of $10,000 of merchandise on account?
A. Dr. Inventory $\quad 10,000$
$\quad$ Cr. Accounts payable $\quad 10,000$
B. Dr. Inventory $\quad$ 10,000
$\quad$ Cr. Purchases $\quad$ 10,000
C. Dr. Purchases $\quad 10,000$
$\quad$ Cr. Inventory $\quad$ 10,000
D. Dr. Purchases $\quad 10,000$
$\quad$ Cr. Accounts payable $\quad$ 10,000

A)Option A
B)Option B
C)Option C
D)Option D

Question 15

According to IFRS, how should inventory be measured on the balance sheet?

A)Historical cost
B)Market value
C)Lower of cost or Net realizable value
D)Net realizable value

Question 16

Which of the following inventory systems uses an adjusting entry to record the cost of sales?

A)Periodic system
B)Perpetual system
C)Just-in-time system
D)No system uses an adjusting entry to record the cost of sales.

Question 17

All of the following are types of inventory except?

A)Capital goods inventory
B)Raw materials inventory
C)Work-in-process inventory
D)Finished goods inventory

Question 18

According to IFRS, all of the following costs should be included in the cost of inventory except:

A)cost of materials for a special order.
B)direct labour involved in manufacturing the product.
C)supervisors' salaries in the plant.
D)storage costs.

Question 19

Which cost flow assumption assumes that the goods purchased first are sold first?

A)FIFO
B)LIFO
C)Average cost
D)Specific identification

Question 20

Which inventory system keeps an ongoing tally of purchases and sales of inventory with adjustments that reflect changes as they occur?

A)Periodic system
B)Perpetual system
C)Just-in-time system
D)Specific identification system

Question 21

If Acker Company wanted to report the highest net income for July, which inventory cost flow assumption should they use?

A)FIFO
B)Net realizable value
C)Average cost
D)Specific identification

Question 22

During a period of rising prices, which of the following cost flow assumptions will result in the highest ending inventory?

A)FIFO
B)Net realizable value
C)Average cost
D)Specific identification

Question 23

The use of the FIFO cost flow assumption:

A)means that the oldest inventory is considered to be the first sold.
B)ensures that the ending inventory contains the oldest inventory costs.
C)requires that a periodic inventory system be used.
D)results in the best matching of costs to the physical flow of goods.

Question 24

Which one of the following inventory costing methods can lead to manipulation of reported income?

A)FIFO
B)LIFO
C)Average cost
D)Specific identification

Question 25

Using the FIFO cost flow assumption, what would be the value of inventory at July 31, 2013?

A)$4,900
B)$5,600
C)$5,708
D)$5,950

Question 26

During a period of rising prices, which of the following cost flow assumptions will result in the highest net income?

A)FIFO
B)Net realizable value
C)Average cost
D)Specific identification

Question 27

For which cost flow assumption would the cost of the units sold be the same as the cost of the units still on hand?

A)FIFO
B)LIFO
C)Average cost
D)Specific identification

Question 28

Which cost flow assumption does not distinguish the costs among units sold and inventory still on hand?

A)FIFO
B)LIFO
C)Average cost
D)Specific identification

Question 29

Which cost flow assumption assumes that the most recently purchased goods are still in inventory?

A)FIFO
B)LIFO
C)Average cost
D)Specific identification

Question 30

Using the FIFO cost flow assumption, what would be the cost of goods sold for July 2013?

A)$35,700
B)$41,350
C)$43,050
D)$43,800

Question 31

Which cost flow assumption assigns the actual cost of a unit to that unit of inventory?

A)FIFO
B)LIFO
C)Average cost
D)Specific identification

Question 32

In Canada, during times in which prices are rising, entities that have a tax minimization objective would choose which of the following cost flow assumptions?

A)FIFO
B)Net realizable value
C)Average cost
D)Specific identification

Question 33

Which of the following cost flow assumptions would most likely be used when inventory is expensive and unique?

A)FIFO
B)LIFO
C)Average cost
D)Specific identification

Question 34

Which of the following businesses would most likely use the specific identification method to value inventory?

A)Department store
B)Food distributor
C)Car dealership
D)Electronic components manufacturer

Question 35

Which of the following cost flow assumptions will result in the same ending inventory under both the perpetual and periodic inventory systems?

A)FIFO
B)LIFO
C)Average cost
D)Net realizable value

Question 36

Using the FIFO cost flow assumption, what would be the inventory valuation at July 31, 2013?

A)$4,900
B)$5,000
C)$5,650
D)$5,950

Question 37

Which cost flow assumption assumes that the goods purchased first are still in inventory?

A)FIFO
B)LIFO
C)Average cost
D)Specific identification

Question 38

Using the FIFO cost inventory method what would be the cost of goods sold for July 2013?

A)$40,800
B)$41,350
C)$41,650
D)$42,400

Question 39

During a period of rising prices, which of the following cost flow assumptions will result in the highest cost of goods sold?

A)FIFO
B)Net realizable value
C)Average cost
D)Specific identification

Question 40

Using the average cost inventory method, what would be the inventory valuation at July 31, 2013 (rounded to the nearest dollar)?

A)$7.00
B)$8.16
C)$8.34
D)$8.50

Question 41

Fundy Corp.has the following information about their inventory at year-end: $\begin{array}{lrr}\text { Item}&\text { Cost }&\text { NRV }\\\hline\# 1 & \$ 12,000 & \$ 12,500 \\\# 2 & 21,250 & 19,750 \\\# 3 & 18,600 & 18,500\end{array}$ If Fundy values their inventory at the lower of cost and net realizable value on a total inventory basis, what would be the loss on inventory write down for the current year?

A)$500
B)$1,100
C)$1,600
D)The loss would not be recorded until the items were sold.

Question 42

All of the following are directly affected by the cost flow assumption used for inventory except?

A)Net income
B)Inventory on the balance sheet
C)The current ratio
D)Cash flow

Question 43

What method of inventory valuation is it when the cost of inventory is defined as the amount that an entity would have to pay to replace its existing inventory?

A)Replacement cost
B)Net realizable value
C)Average cost
D)FIFO

Question 44

A company values its inventory at lower of cost and net realizable value (NRV).It paid $250 for, and still has on hand, 10 units that it expects to sell for $400 less selling costs of $40.Which of the following statements is true related to these goods in this period?

A)The company recognizes $400 of selling costs.
B)The inventory is valued at $2,100.
C)The inventory is valued at $2,500.
D)The inventory is valued at $3,600.

Question 45

Fundy Corp.has the following information about their inventory at year-end: $\begin{array}{lrr}\text { Item}&\text { Cost }&\text { NRV }\\\hline\# 1 & \$ 12,000 & \$ 12,500 \\\# 2 & 21,250 & 19,750 \\\# 3 & 18,600 & 18,500\end{array}$ If Fundy values their inventory at the lower of cost and net realizable value on a total inventory basis, what would be their year-end inventory balance on the balance sheet?

A)$50,250
B)$50,750
C)$51,850
D)$52,350

Question 46

Hopewell Ltd.had 1,000 units of inventory on hand at the beginning of the year worth $4,000.During the year, they purchased 15,000 units at $4.25 and 10,000 units at $4.40.They sold 24,500 units during the year.If Hopewell uses the average cost assumption for inventory valuation, what would their ending inventory value at year-end be closest to?

A)$6,325
B)$6,447
C)$6,465
D)$6,600

Question 47

Company A's line of credit at the bank is based on the dollar amount of inventory on hand.Each month the bank adjusts the line of credit based on the inventory amount provided by the company.If prices are rising which cost flow assumption would management most likely prefer?

A)FIFO
B)Net realizable value
C)Average cost
D)Specific identification

Question 48

An analyst is comparing two companies; one uses the LIFO inventory cost flow assumption, and the other uses the FIFO inventory cost flow assumption.If prices are rising, how will the FIFO using company's gross margin and current ratio compared to the LIFO using company's, if all other factors are equal? $$\begin{array} { l l l } & \text { FIFO } &{ \text { FIFO } } \\& \text { Gross Margin } & \text { Current ratio } \\\hline\text { A. } & \text { Higher } & \text { Higher } \\\text { B. } & \text { Higher } & \text { Lower } \\\text { C. } & \text { Lower } & \text { Higher } \\\text { D. } & \text { Lower } & \text { Lower }\end{array}$$

A)Option A
B)Option B
C)Option C
D)Option D

Question 49

Hopewell Ltd.had 1,000 units of inventory on hand at the beginning of the year worth $4,000.During the year, they purchased 15,000 units at $4.25 and 10,000 units at $4.40.They sold 24,500 units during the year at an average price of $7.50 and pay taxes at 25%.If Hopewell uses average cost for inventory valuation, what was their gross profit for the year closest to?

A)$58,800.00
B)$77,780.50
C)$78,400.00
D)$80,605.75

Question 50

Kane Limited's most popular inventory item was purchased at a cost of $22 and can currently be replaced at a cost of $15.The item sells for $25, and the company incurs $5 in selling cost on each item sold.If 4,000 units are on hand at year-end, what is the value of the ending inventory using the lower of cost and market, where the company defines market as net realizable value?

A)$48,000
B)$60,000
C)$80,000
D)$100,000

Question 51

Fundy Corporation has the following information about their inventory at year-end: $\begin{array}{lrr}\text { Item}&\text { Cost }&\text { NRV }\\\hline\# 1 & \$ 12,000 & \$ 12,500 \\\# 2 & 21,250 & 19,750 \\\# 3 & 18,600 & 18,500\end{array}$ If Fundy values their inventory at the lower of cost and net realizable value on an item-by-item basis, what would be their year-end inventory balance on the balance sheet?

A)$50,250
B)$50,750
C)$51,850
D)$52,350

Question 52

Which cost-based inventory valuation system would a company prefer if it wanted their inventory valuation on the balance sheet to approximate replacement cost?

A)FIFO
B)LIFO
C)Average cost
D)Specific identification

Question 53

What method of inventory valuation is it when the cost of inventory is defined as the amount that an entity would receive from selling the inventory, less any additional selling costs?

A)Replacement cost
B)Net realizable value
C)Average cost
D)FIFO

Question 54

Which cost-based inventory valuation system is more useful to a user trying to predict future profitability?

A)FIFO
B)LIFO
C)Average cost
D)Specific identifications

Question 55

If a company values inventory at the lower of cost and NRV, where market is defined as replacement cost, and prices are rising, which cost assumption would most likely require the smallest write down?

A)FIFO
B)LIFO
C)Average cost
D)The write down is not affected by the cost flow assumption.

Question 56

Fundy Corp.has the following information about their inventory at year-end: $\begin{array}{lrr}\text { Item}&\text { Cost }&\text { NRV }\\\hline\# 1 & \$ 12,000 & \$ 12,500 \\\# 2 & 21,250 & 19,750 \\\# 3 & 18,600 & 18,500\end{array}$ If Fundy values their inventory at the lower of cost and net realizable value on an individual basis, what would be loss on inventory write down for the current year?

A)$500
B)$1,100
C)$1,600
D)The loss would not be recorded until the items are sold.

Question 57

If a company writes down inventory using the lower of cost and net realizable value rule, which of the following statements is true?

A)A loss is recognized in the period when the market value falls below cost.
B)A loss is recognized in the period when the inventory is sold.
C)The inventory is carried on the balance sheet at its historical cost.
D)The company can write the inventory back up if its value recovers.

Question 58

Which cost-based inventory valuation system provides more relevant information about a company's gross margin and net income when the prices of inventory are rising?

A)FIFO
B)LIFO
C)Average cost
D)Specific identifications

Question 59

Jones Pharmaceuticals is reviewing the value of one of its more expensive drugs.The drug has been selling for $32, but a competitor has recently introduced a new product that provides the same benefits with fewer side effects.Therefore, the drug can only be sold for $12 per unit.Its unit purchase cost was $22.The current replacement cost is $10.If inventory is reported at lower of cost or net realizable value, what amount should be reported for the inventory of 30,000 units?

A)$660,000
B)$300,000
C)$360,000
D)$960,000

Question 60

Which cost-based inventory valuation system is most useful to a user trying to predict future cash flows?

A)FIFO
B)LIFO
C)Average cost
D)Specific identifications

Question 61

Harvest Moon Produce has several acres of farmland on which they grow asparagus.Asparagus takes five or more years to produce its first crop, and afterwards produces every two years.Harvest Moon grows the crop in rotation so they will have product every year.The costs that Harvest Moon undertakes to maintain the non-producing acreage in a given year should be charged to:

A)net income.
B)other comprehensive income.
C)deferred costs.
D)retained earnings.

Question 62

A high inventory turnover indicates which of the following?

A)That the inventory is liquid and moving quickly.
B)That there is obsolete inventory.
C)That the company is building up inventory as part of an expansion plan.
D)That the company is experiencing a slowdown in sales.

Question 63

In October 2013, Harvest Moon Produce entered into a contract with Boblaws Distribution to sell them 100,000 cases of oranges during the coming year.Harvest Moon grows their oranges on approximately 100 acres of prime land for orange trees.At the time of the contract, the fair value of oranges was $25 per case.The weather had been unusually warm and Harvest Moon expects to harvest approximately 130,000 cases.The additional 30,000 cases will have a selling cost of $2 per case.
Unfortunately, by the end of the year, the excess supply of oranges has driven the market price down to $20 per case.In their December 31 financial statements, Harvest Moon should value their agricultural inventory at:

A)the amount of costs they have invested that year.
B)$2,540,000
C)$3,040,000
D)$2,500,000

Question 64

Despite the fact that IFRS has placed lower emphasis on this accounting principal, accountants tend to favour it, in order to counterbalance management's tendency to be overly optimistic with accounting estimates in:

A)materiality.
B)historical cost.
C)conservatism.
D)reliability.

Question 65

When evaluating the performance of a service company, financial analysts would likely use all of the following ratios except:

A)profit margin.
B)operating cash flow to net income.
C)gross profit.
D)accounts receivable turnover.

Question 66

In order to prevent companies from selecting inventory costing methods just to avoid tax, the Canada Revenue Agency:

A)allows only the FIFO method to be used.
B)allows only average cost to be used.
C)places restrictions on the company's ability to change methods.
D)accepts any method that is used for accounting purposes.

Question 67

For income tax purposes, if the NRV of inventory at year end is lower than cost, the company is permitted:

A)a change in method which lowers the cost to less than the NRV.
B)a tax deductible expense for the amount of the loss.
C)a deferral of tax for the amount of the gain.
D)to use the specific identification method.

Question 68

Which of the following accounting methods is permitted under IFRS when accounting for biological assets and agricultural produce?

A)Cost
B)Selling price less cost to sell
C)Fair value less cost to sell
D)NRV

Question 69

When accounting for inventory, the Canada Revenue Agency requires the use of which of the following inventory cost flow method?

A)FIFO
B)Average cost
C)Specific identification
D)The method that presents the truest picture of the taxpayer's income.

Question 70

The basic accounting concept that refers to the tendency of accountants to resolve uncertainty in favour of understating assets and income is known as:

A)Conservatism.
B)Materiality.
C)Relevance.
D)Revenue recognition.

Question 71

After the financial statements were prepared for 2012, Wickham Ltd.discovered that an error had been made during the year-end inventory count and one room containing $40,000 worth of goods, at cost, had been missed.A review of the accounting records showed that all purchases had been recorded.The company's tax rate is 40%.If the error is not corrected, what would be the effect of this error on 2012 net income?

A)$16,000 understated
B)$24,000 overstated
C)$24,000 understated
D)No effect in 2012

Question 72

Axelrods Inc.uses a perpetual inventory system.In Dec 2013, the accountant neglected to record a purchase of merchandise on account at year end.This merchandise was also omitted from the year-end physical count.How will this error affect assets, liabilities, and shareholders' equity at year end and net income for the year? $\begin{array}{llll}&\text { Assets } & \text { Liabilities } & \text { Shareholders' Equity }& \text { Net Income }\\\hlineA.&\text { No effect } & \text { Understated } & \text { Overstated } & \text { Overstated. } \\B.&\text { No effect } & \text { Overstated } & \text { Understated } & \text { Understated. } \\C.&\text { Understated } & \text { Understated } & \text { No effect } & \text { No effect. } \\D.&\text { Understated } & \text { No effect } & \text { Understated } & \text { Understated }\end{array}$

A)Option A
B)Option B
C)Option C
D)Option D

Question 73

If, at the end of a period, a company erroneously excluded some goods from its ending inventory and also erroneously did not record the purchase of these goods in its accounting records, these errors would cause:

A)the ending inventory and retained earnings to be understated.
B)the ending inventory, cost of goods sold, and retained earnings to be understated.
C)no effect on net income, working capital, and retained earnings.
D)cost of goods sold and net income to be understated.

Question 74

Which of the following businesses would you expect to have the highest inventory turnover ratio?

A)A grocery store
B)A woman's clothing store
C)A manufacturer of women's clothing
D)A manufacturer of heavy equipment

Question 75

Harvest Moon Produce has two hundred acres of apple and peach trees.Each year the company must adjust their inventory to fair value less costs to sell.The resulting gain or loss from this adjustment should be charged to:

A)retained earnings.
B)other comprehensive income.
C)deferred costs.
D)net income.

Question 76

A company values its inventory at net realizable value (NRV).It paid $250 for, and still has on hand, 10 units that it expects to sell for $400 less selling costs of $40.Which of the following statements is true related to these goods in this period?

A)The company recognizes $400 of selling costs.
B)The inventory is valued at $2,100.
C)The inventory is valued at $2,500.
D)The inventory is valued at $3,600.

Question 77

The accounting firm of Lassiter Black LLC.is preparing their year-end financial reports.The firm has incurred the following costs relating to work, which is not yet completed: $$\begin{array}{l}\begin{array} { l r } \text { Salaries } & \$ 2,700 \\\text { Travel expenses } & \$ 650\end{array}\\\text { Printing and supplies } \quad \$ 350\end{array}$$ Under IFRS, these costs should be charged to:

A)net income.
B)other comprehensive income.
C)work in progress.
D)retained earnings.

Question 78

After the financial statements were prepared for 2012, Wickham Ltd.discovered that an error had been made during the year-end inventory count and one room containing $40,000 worth of goods, at cost, had been missed.A review of the accounting records showed that all purchases had been recorded.The company's tax rate is 40%.If the error is not corrected, what is the effect of this error on 2013 net income?

A)$16,000 overstated
B)$24,000 overstated
C)$24,000 understated
D)No effect in 2013

Question 79

After the financial statements were prepared for 2012, Wickham Ltd.discovered that an error had been made during the year-end inventory count and one room containing $40,000 worth of goods, at cost, had been missed.A review of the accounting records showed that all purchases had been recorded.The company's tax rate is 40%.If the error is not corrected, what is the effect of this error on 2013 closing retained earnings?

A)$16,000 overstated
B)$24,000 understated
C)$40,000 understated
D)No effect

Question 80

Which of the following best illustrates the accounting concept of conservatism?

A)Use of the allowance method to recognize bad debt losses from credit sales
B)Use of the lower of cost or NRV approach in valuing inventories
C)Use of the same accounting method from one period to the next in calculating amortization expense
D)Utilization of a policy of deliberate understatement of asset values in order to present a conservative net income figure